How to account for COGS when scrapping/selling inventory from closed jewelry business?

This is a great question about a specific situation many small business owners face when closing shop. When you scrap inventory, you're essentially selling those materials, just not in the form of your finished products. The IRS would consider this a business transaction, even in the final year of operation. The money you received from the refiner ($7,300) should be reported as business income on your Schedule C. Then, you'd offset this by reporting the original cost of the inventory ($12,500) as Cost of Goods Sold on the same form. This would result in showing a loss of $5,200, which is legitimate since you didn't recover the full value of your materials. Don't report this as "other income" since it's directly related to your business operations, even though you're closing down. Think of it as your final business transaction - selling inventory, just in raw form rather than as finished watches.

This is a great question about how to handle inventory when closing a business. The money you received from scrapping your jewelry inventory would be reported on your Schedule C as "gross receipts or sales." Even though you didn't sell to customers, you still converted inventory to cash. You'll need to account for your Cost of Goods Sold on Part III of Schedule C. Your beginning inventory for the year would be what you had on December 31 of the previous year. Since you scrapped everything, your ending inventory should be zero. The difference between what you paid for the inventory (your cost basis) and what you received from the refiner represents either a gain or loss on your business operations. Make sure you have documentation showing both the original cost of the inventory items and what you received from the refiner. This completes the business cycle for your jewelry and properly closes out your business on your final tax return.

After closing my Etsy jewelry shop last year, I was in a similar situation with leftover supplies. I found this amazing AI tax assistant at https://taxr.ai that helped me figure out exactly how to handle my scrapped inventory. I uploaded my previous year's Schedule C and some notes about my situation, and it gave me step-by-step guidance. The tool explained that I needed to report the scrap value as business income and then claim the original cost as COGS, exactly as the previous commenter mentioned. What I found super helpful was that it showed me exactly which lines to use on Schedule C and provided sample calculations based on my specific numbers.

After struggling with a similar situation when closing my online craft supply business, I found a tool that literally saved me hours of frustration. I was confused about how to handle my liquidated inventory and where to report everything. I uploaded my business records to https://taxr.ai and it analyzed my situation perfectly. It even spotted that some of my scrapped inventory could be classified differently to optimize my deductions. The tool walked me through exactly how to complete Schedule C including the COGS section, showing me where each number should go. What impressed me was that it could distinguish between regular inventory liquidation and business assets that needed different treatment. Definitely worth checking out if you're still trying to figure this out with only a few days left!

I wanted to follow up about my experience with taxr.ai after I asked about it. I decided to give it a try with my woodworking business closure where I had about $8k in specialty hardwoods I sold off. The guidance was incredibly specific to my situation. It explained that I needed to include the sale of my inventory materials on Part I, Line 1 of Schedule C as gross receipts, then account for the original cost on Part III as COGS. It even clarified how to handle the partially finished items vs. raw materials, which was a distinction I hadn't considered. What really impressed me was that it alerted me to the fact that I could also deduct business closure costs in the final year, which included things like early lease termination fees I paid to get out of my workshop space. Saved me around $1,200 in taxes I would've missed!

I was super skeptical about using an AI tax tool for my closed business situation, but I'm glad I tried taxr.ai after seeing it mentioned here. My studio closed last year and I had tons of partial inventory that I sold for scrap. The system actually found that I was about to make a major mistake! I was going to report my scrap income as "other income" rather than regular sales, which would have caused me to miss out on offsetting it with my COGS. It walked me through the proper way to report everything on Schedule C, including how to properly zero out my ending inventory. The documentation guidance was extremely helpful too - it told me exactly what I needed to save in case of questions later. Definitely worth it for peace of mind when dealing with an unusual tax situation like closing a business!

If you've been trying to call the IRS to get clarification on your business closure and inventory questions, good luck! I spent 3 weeks trying to get through to someone. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an IRS agent in less than 20 minutes when I had been trying for days. The IRS agent confirmed exactly what others here are saying - report the scrap sale as business income, offset by COGS, all on your final year Schedule C. But she also pointed out that I needed to file Form 4797 for some equipment I sold when closing my business, which was something I hadn't even considered. Totally different tax treatment than inventory!

After reading this thread, I realized I had a similar issue with my closed business taxes. I tried calling the IRS business helpline for clarification on COGS treatment, but after being on hold for TWO HOURS, I gave up. Then I remembered seeing something about a service called https://claimyr.com that helps you skip the IRS phone queues. I was pretty desperate with the filing deadline approaching, so I checked out their demo video at https://youtu.be/_kiP6q8DX5c and decided to give it a shot. They actually got me connected to an IRS agent in about 20 minutes! The agent confirmed exactly how to handle the scrapped inventory situation - it gets reported as sales with the original cost fully accounted for in COGS. Having that official confirmation really gave me peace of mind for filing my final business return.

I feel like I need to eat some crow here. After posting my skeptical comment, I decided to try Claimyr since I was desperate to talk to someone about my business closure taxes. I had a food truck I was shutting down with inventory, equipment, the whole mess. It actually worked exactly as advertised. I got a call back in about 25 minutes, and they connected me directly to an IRS agent. The agent walked me through how to handle my remaining food inventory (which I'd donated) and the equipment sales. They confirmed I needed to use Form 4797 for the equipment but Schedule C for the inventory. The agent even caught that I was eligible for a specific deduction related to food inventory donations that I had no idea existed. Honestly worth every penny just for that tip alone - saved me hundreds.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I was getting nowhere with the IRS on my own. Not only did I get through to the IRS in about 15 minutes, but the agent I spoke with was incredibly helpful about my business closure situation. She confirmed exactly how to handle the scrapped inventory on Schedule C and even explained some deductions I could take for the costs associated with closing down the business that I hadn't considered. The time saved was honestly worth it - I would have missed the extended filing deadline if I'd kept trying to get through on my own. Sometimes being proven wrong is actually the best outcome!

Has anyone dealt with the situation where some inventory was scrapped but some was donated? I closed my jewelry shop too and sent about 70% to a refiner but donated the rest to a local art school. Not sure if that complicates things...

qucik question - does anyone know if selling on eBay instead of scrapping would be treated any differently? i still have all my beading supplies from my failed business and was thinking of just selling them piece by piece online rather than scrapping.

Don't forget to check your state tax requirements too! I closed my craft business and handled the federal return exactly as described here (income from selling off supplies offset by COGS), but my state had additional forms for business closure. Also, if you collected sales tax in your jewelry business, make sure you file your final sales tax return and formally close your sales tax account. Some states require a special "final return" marking. I got hit with penalties in Illinois because I didn't properly close my sales tax account and they kept expecting monthly filings.

Has anyone used TurboTax Self-Employed to handle this kind of situation? I'm trying to report scrapped inventory from my closed pottery business and the software seems confused about how to categorize it. It keeps wanting to put the income as "Other Income" rather than business income that can be offset by COGS.

Just wanted to add another perspective on this - I closed my metalworking business last year and had a similar situation with scrap metal sales. One thing that helped me was keeping detailed records of exactly what was scrapped versus what was sold as finished goods, even though both get reported the same way tax-wise. The IRS agent I spoke with mentioned that having clear documentation helps if there are ever questions about the valuation. For precious metals especially, make sure you keep the settlement statement from your refiner showing the exact weights and purity levels they used for pricing. This supports your income reporting and helps justify the difference between your original cost and the scrap value received. Also, don't forget that any fees the refiner charged (processing, shipping, etc.) can be deducted as business expenses in your final year. In my case, the refiner charged about $200 in fees, which I was able to deduct separately from the COGS calculation.

Based on everything discussed here, it sounds like you're on the right track with treating this as business income offset by COGS. Just to summarize the key points for your situation: 1. Report the $7,300 from scrapping as business income on Schedule C (gross receipts) 2. Include your original inventory cost of $12,500 in the Cost of Goods Sold section 3. This creates a legitimate business loss of $5,200 that reduces your taxable income 4. Keep all documentation - your refiner settlement statement and original purchase receipts Since you mentioned your extension expires in a few days, you might also want to double-check if you need to file any final business closure forms with your state. Many states require formal notification when a business stops operating, especially if you collected sales tax. The good news is this is a straightforward situation tax-wise, even though it feels complicated. You're essentially completing your final business transaction by converting remaining inventory to cash, which is exactly how the IRS expects it to be reported.